In this video, I’m sharing with you some news that may upset you – your 401k contributions are subject to payroll taxes. Regardless, you should still contribute to your 401k! #payrolltax #401k #taxes

To continue learning more about this subject, check out the following:

Medicare Tax Payroll Taxes:

Social Security Payroll Taxes:

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Disclosure Disclaimer: The information in this video is provided for general educational purposes only and may not reflect changes in federal or state laws. Please consult with a professional tax advisor about your facts and circumstances.

Circular 230 Disclaimer. Nothing contained herein concerning certain federal income tax considerations is intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transactions or tax-related matters addressed herein….(read more)

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Are 401(k) Contributions Subject to Payroll Taxes?

One of the main factors to consider when saving for retirement is the tax implications of your contributions. You’re probably familiar with 401(k) plans as a popular way to save for retirement, but are these contributions subject to payroll taxes? Let’s delve into this topic and shed some light on how 401(k) contributions are treated for tax purposes.

In a nutshell, the good news is that 401(k) contributions are not subject to payroll taxes. Payroll taxes typically refer to Social Security and Medicare taxes, which are automatically deducted from your paycheck to fund those programs. These taxes are calculated as a percentage of your wages and are used to provide benefits to retirees and individuals with disabilities.

While 401(k) contributions are not subject to payroll taxes, you should be aware that these contributions are subject to federal income tax. This means that the money you contribute to your 401(k) is deducted from your total taxable income. Consequently, your overall tax liability may be reduced depending on the amount of your contributions.

The advantage of 401(k) plans lies in their tax-deferred nature. This means that any investment gains or earnings generated within the account are not taxed until you withdraw the funds during retirement. By deferring taxes, your retirement savings can potentially grow significantly over time due to compounding interest.

It’s worth noting that contributions to a 401(k) plan can also be made on a pre-tax or after-tax basis, depending on the type of plan your employer offers. Traditional 401(k) plans allow pre-tax contributions, meaning the money is deducted from your paycheck before income taxes are calculated. On the other hand, Roth 401(k) plans accept after-tax contributions, allowing you to make contributions with money that has already been taxed.

Another important aspect to consider is that there are annual limits on 401(k) contributions. As of 2021, the IRS sets the maximum contribution limit at $19,500 for individuals under the age of 50. If you’re 50 or older, you’re eligible to make catch-up contributions of an additional $6,500, bringing the total contribution limit to $26,000.

In conclusion, 401(k) contributions are not subject to payroll taxes but are subject to federal income tax. This is a valuable benefit as it reduces your current tax liability while allowing your investment to potentially grow tax-deferred. However, it’s always a good idea to consult with a tax professional or financial advisor to fully understand the tax implications and optimize your retirement savings strategy.